THE INFLUENCE OF FOREIGN INVESTMENT AND MARKET SENTIMENT ON INDONESIA GOVERNMENT BOND YIELD, WITH EXCHANGE RATE AS A MODERATING VARIABLE

Resumen

This study investigates how foreign investment and market sentiment influence the yield of Indonesian government bond, with the exchange rate serving as a moderating variable. The research seeks to explain the behavioral and macro-financial channels through which sentiment and capital flows affect sovereign yield dynamics in an emerging market context. Using monthly panel data from August 2018 to July 2025 across four benchmark tenors (5, 10, 15, and 20 years). The study applies the Fixed Effects model with Driscoll–Kraay robust standard errors (FE–DK) as the main estimation approach. Model selection and diagnostic tests ensure the model’s reliability. Robustness verification is conducted using Random Effects (RE–Clustered) and wild cluster bootstrap-t procedures. The results show that domestic market sentiment, proxied by the Consumer Confidence Index (SENT), has a positive and significant impact on government bond yields. Foreign investment flows exhibit a positive but less consistent relationship, becoming significant under robust inference. The exchange rate plays a strong moderating role, amplifying the effects of both foreign flows and sentiment on yield movements. This study contributes to the literature by integrating Capital Flow Theory, Behavioral Finance, and Exchange Rate Risk Premium perspectives to explain sovereign yield behavior in an emerging economy. The findings highlight the policy importance of maintaining exchange-rate stability and transparent communication to sustain investor confidence and bond-market resilience in Indonesia.